Economics, environment, mobility, safety

Biofuel for Thought

Few issues in transport policy are as contentious as biofuels. They illustrate the tensions between the need to achieve our economic, social and environmental objectives – sustainability development – all too well: the need to keep people moving while minimising any environmental impacts and avoiding high food prices.

So what has all the recent fuss been about? Here’s what’s happened.

Several years ago the European Commission adopted two important policies relating to biofuels: the Renewable Energy Directive (RED) and the Fuel Quality Directive (FQD). The RED stipulates, amongst other things, that by 2020 10% of transport fuels (by energy) must be renewable; the FQD, on the other hand, mandates a 6% reduction in the greenhouse gas intensity of fuels used in road transport and non-road mobile machinery, also by 2020. The word ‘Directive’ is important here: it means that it is largely up to the member states to decide how exactly to reach these targets. In the UK, the Directives have been implemented as the Renewable Transport Fuels Obligation (RTFO), which in effect is a scheme that allows fossil fuel suppliers to trade certificates (similar to the carbon emissions trading scheme), depending on whether they are under- or over-performing on the targets.

Over the years the Directives have come under fire for two main reasons. First, they are said to ignore the contentious issue of indirect land-use change – ILUC – and associated greenhouse gas emissions. ILUC refers to the conversion of land such as forests and wetlands to agricultural land to make biofuels. This issue was raised in the government-commissioned Gallagher Review of 2008, which led to a reduction in biofuel targets in the early 2010s. Second, the production of certain types of biofuels may cause higher food prices because large swathes of land are now being cultivated for biofuels, thereby taking away land for food crops.

These two problems are mainly associated with so-called ‘first-generation’ biofuels – those produced from food crops. More advanced biofuels, ‘second-‘ and ‘third-generation’ biofuels such as those from waste products or algae, do not cause these problems, although there may be other indirect effects that are not yet well understood.

In response to these criticisms, the European Commission recently proposed (in a document that was leaked) to set a cap on the permitted volume of biofuels produced from food crops at 5% (as a share of total fuels) to mitigate these adverse impacts; the currently level of supply is already at 4.5%. The problem lies in the fact that since (and even before) the Directives were implemented, EU biofuel producers have large ‘sunk investments’ in these types of biofuels, of the order of €17 billion. This money is now effectively wasted. The problem is compounded by the fact that advanced biofuels are far from commercially viable, and are unlikely to be so by 2020, which means it may prove more difficult than initially thought to reach the targets. The Commission’s response to this has been to propose giving extra weight to advanced biofuels (in effect, double counting) to help meet the targets.

Situations like these – including pulling the plug on subsidies for solar in the UK – illustrate the risks associated with setting targets and policy generally. Changing the policy framework (which can easily happen if ‘the science’ changes) creates uncertainty in the market and makes investment risky. In some cases it goes wrong.